IFRS 17 – Accounting for reinsurance contracts held | KPMG | MU
close
Share with your friends
Abacus

Accounting for reinsurance contracts held

Accounting for reinsurance contracts held

More in this series

Key observation

Map and compass

If a reinsurer has the right to reprice a reinsurance contract subject to a notice period and the cedant is compelled to pay reinsurance premiums, then the expected cash flows after the notice period are included within the contract boundary of the reinsurance contract held.

Boundaries of reinsurance contracts held

February 2018 TRG meeting

What's the issue?

Some reinsurance contracts include terms that allow the reinsurer to reprice the remaining coverage under a contract prospectively, after giving notice to the cedant. Only if the reinsurer provides notice of repricing does the cedant have the right to terminate cover mid-term.

These features raise the question of whether an insurer holding such a contract should include in the contract boundary all expected cash flows on initial recognition, or only the expected future cash flows up until the end of the notice period.

 

What did the TRG discuss?

Previously, TRG members observed that cash flows within the boundary of a reinsurance contract held arise from the substantive rights and obligations of the cedant (see Boundaries of reinsurance contracts held).

For reinsurance contracts held:

  • a substantive right is a right to receive services from the reinsurer; and
  • a substantive obligation is an obligation to pay amounts to the reinsurer – i.e. the reinsurer can compel the cedant to pay reinsurance premiums.

Therefore, cash flows are within the contract boundary of a reinsurance contract held if they arise from substantive rights and obligations that exist during the reporting period in which the cedant:

  • is compelled to pay amounts to the reinsurer; or
  • has a substantive right to receive services from the reinsurer.

The TRG members observed that since the cedant does not have control over its ability to terminate the coverage of the reinsurance contract, it remains compelled to pay premiums to the reinsurer. Therefore, the contract boundary for the cedant would include expected cash flows after the notice period.

 

What's the impact?

In some cases, the cedant can be compelled to pay reinsurance premiums for reinsurance contracts held. This obligation might impact the cash flows that will be used to measure the reinsurance contract.

Insurers should carefully analyse the terms and conditions of the reinsurance contracts that they hold and all of the relevant facts and circumstances to determine the contract boundary. This involves looking at the rights and obligations of both parties to the contract.

 

Back to top | Other topics in this series

Boundaries of reinsurance contracts held

February 2018 TRG meeting

What's the issue?

IFRS 17’s contract boundary requirements – which determine which cash flows are included in the measurement of contracts – appear to use terminology specific to insurance contracts issued by insurers.

This raises a question over how the requirements should be applied to reinsurance contracts held by insurers.

 

What did the TRG discuss?

TRG members appeared to agree that these requirements should be adapted in an appropriate way for determining the contract boundaries of reinsurance contracts held. Therefore, cash flows are within the boundary of a reinsurance contract held when the entity has a substantive right to receive services from the reinsurer.

This substantive right ends when the reinsurer:

  • has the practical ability to reassess the risks transferred to it; and
  • can set a price or level of benefits for the contract that fully reflects the reassessed risk.

 

What's the impact?

Many reinsurance contracts provide coverage for claims that occur on underlying contracts that are issued during a period of time.

Currently, most insurers holding these reinsurance contracts recognise and measure them to the extent the underlying contracts are written – i.e. without reflecting expectations of future underlying contracts that will be covered by the reinsurance contract held.

This may change under IFRS 17, because the initial and subsequent measurement of the reinsurance contract held can include cash flows from underlying contracts that are expected to be issued in the future if they are considered to be inside the boundaries of the reinsurance contract.

Consequently, the recognition pattern for reinsurance costs could change for many insurers. The processes and systems that are used to measure reinsurance contracts held might also need to change.

Insurers should analyse the terms and conditions of the reinsurance contracts they hold. For example, a term that provides the reinsurer with the ability to stop covering future underlying contracts with a few months’ notice, which is common in practice, might shorten the contract boundary.

 

 

Back to top | Other topics in this series

About this page

This topic page is part of our Insurance – Transition to IFRS 17 series, which covers the discussions of the IASB's Transition Resource Group (TRG) for Insurance Contracts.

You can also find more insight and analysis on the new insurance contracts standard at kpmg.com/ifrs17.